English universities can cope with a freeze in tuition fees for two years but face “consequences” if funding is not subsequently increased, the chief executive of the ����Vlog Funding Council for England has warned.

Addressing Hefce’s annual meeting in London, Madeleine Atkins described institutions’ surpluses as a “narrow gap”. Hefce’s said that the government’s decision to peg fees at £9,250, rather than increase them in line with inflation, would reduce universities’ income by £113 million in 2018-19, and £333 million in 2019-20.

The effect of this would be to reduce average sector surpluses from 2.1 per cent of income to 1.8 per cent of income in 2018-19, and from 3.4 per cent to 2.4 per cent in 2019-20.

“The sector can cope with this for two years,” Professor Atkins said. “If nothing improves in that time, there will be consequences.”

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Hefce predicts that sector surpluses will be lowest this year, 2017-18, averaging 1.3 per cent (£403 million). However, several institutions are predicting annual deficits, including one expecting to make a loss equivalent to 18.6 per cent of total income.

The report explains how English universities are set to become increasingly reliant on tuition fees paid by international students, which represented 25.4 per cent of total fee income in 2015-16 but are set to account for 27.7 per cent in 2019-20.

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The most selective universities are most reliant on foreign learners, with this income stream set to represent 39.6 per cent of total fee income for high-tariff institutions by the end of the decade.

However, there is again expected to be significant variation in universities’ performance. While one institution is predicting that overseas fee income will grow by 241 per cent in the run-up to 2019-20, others are predicting falls of as much as 71 per cent.

Highlighting risks from increased competition and demographic change in China, England’s biggest overseas student market, Hefce warns that it may still “be a challenge for some institutions to achieve their predicted growth levels”.

Expenditure is also projected to increase, reflecting growing staff costs and, for some providers, the likelihood of increased pension contributions to the Universities Superannuation Scheme, while capital spending is also predicted to rise.

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As a result, institutions are predicted to become increasingly reliant on borrowing. The report says that the sector was expected to enter a period of net debt – where borrowing exceeds liquidity – at the end of 2016-17.

This figure was expected to grow from £577 million on that date to £5 billion in 2019-20. Again, the most selective institutions are forecasting the largest net debt, and are predicted to account for more than £4 billion of the total at the end of the decade.

The trend of increasing borrowing and reducing liquidity is “clearly unsustainable in the long term”, the report says.

Hefce concludes that the uncertainty from Brexit, increasing global competition, domestic policy changes and increased competition will all combine to “present challenges” to some institutions in achieving financial projections.

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“This is likely to lead to greater focus from investors on the financial strength of individual [institutions],” the report says. “Any fall in overall levels of confidence in the sector could restrict the availability of finance and put significant elements of the sector’s investment programme at risk.”

rachael.pells@timeshighereducation.com